SOCIEDADE NACIONAL DE COMBUSTÍVEIS DE ANGOLA-EMPRESA PUBLICA v. CHINA SONANGOL INTERNATIONAL LTD AND OTHERS

HCMP 670/2018

[2019] HKCFI 1443

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 670 OF 2018

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D E C I S I O N

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The Applications

1.  The Petitioner[1] seeks orders:

(1) enjoining the Respondents from disposing of assets listed in a schedule to the summons;

(2) requiring the Respondents to procure a representative of the Petitioner to the boards of the companies specified in a schedule to the summons;

(3) requiring the Respondents to procure that the representative become an authorised signatory to bank accounts specified in the schedule;

(4) to procure the reinstatement of various staff identified in the summons; and

(5) restraining the 3^rd, 4^th, 5^th and 6^th Respondents from acting as directors of the companies specified in a schedule to the summons.

2.  At a call over hearing before Au-Yeung J the  3^rd to 5^th Respondents gave undertakings to the effect that the assets of the Group of which the 2^nd Respondent is the holding company would not be disposed of.  Subsequently, the 6^th Respondent gave the same undertaking.

Background

3.  The Petitioner (“Sonangol”) is incorporated in Angola.   It asserts in its Petition that it is Angola’s national oil company and wholly owned by the State of Angola.  It is the exclusive licensee for the exploration of oil and gas in the basement and on the continental shelf of Angola.  Its activities cover the whole range of activities concerning the production and sale of hydrocarbons.  Sonangol owns 30% of the 1^st Respondent, China Sonangol International Limited (“CSIL”).   The remaining 70% is owned by the 2^nd Respondent, New Bright International Development Limited (“New Bright”).

4.  CSIL currently has the following directors:  the 3^rd Respondent, (“Ms Fung”), Lo Fong Hung, (“Ms Lo”), Ms Lo’s alternate since August 2016 Wang Xiangfei, and Maria Francisco De Lemos Jose.  The Petition asserts that since its incorporation in 2005 CSIL has carried on its business through subsidiaries in investment holdings, property development and the development and sale of crude oil produced in Angola (which I shall refer to collectively as the “Group”).  The crude oil business carried out in Angola has been managed by Sinopec.

5.  The Petition also asserts that although Ms Fung has been a director of CSIL since 2005 she took no part in its management until mid-2016.  This would appear to be accepted by Ms Fung[i].  Although she held shares in New Bright she did so as nominee of her husband or partner, Sam Pa, who had been instrumental in the formation and development of the Group until he was detained in the Mainland in October 2015.  At the time of the hearing the Parties understood he was still in detention.

6.  Perhaps surprisingly given the size of CSIL’s business and the character of Sonangol, the shareholders did not enter into a written shareholders agreement.  It is, however, asserted in the Petition that CSIL was formed on the basis of certain understandings:

(1) Each shareholder would have a director corresponding to its shareholding: New Bright would have two and Sonangol would have one.

(2) Each shareholder would be entitled to have its representative director appointed a director of any Group company and to be an authorised signatory of any Group company.

(3) The shareholders and directors would consult each other about major matters.

(4) The day-to-day affairs of the non-crude business, with certain exceptions, would be managed by professional managers independent of the shareholders.

7.  Singapore is the jurisdiction from which much of the Group’s affairs have been managed and in which a number of the subsidiaries have been incorporated and have bank accounts.  The Group’s business was until the matters of which Sonangol complains occurred, managed by a professional team of executives based in Singapore.

8.  In January 2017 most of the senior management team in Singapore resigned.  The Petition alleges that this was triggered by a combination of three things.  First, “Know Your Client” difficulties arising from the connection between Sam Pa, who was arrested in the Mainland in October 2015.  Secondly, Ms Fung’s uncooperative attitude in dealing with the affairs of the Group.  Thirdly, disputes between Ms Fung and Ms Lo following Sam Pa’s detention.

9.  Following these resignations the Singapore management team consisted of Lawrence Lam, managing director and  head of the Singapore office, Philip Ye, head of legal at CS International (S) Pte Limited (“CSIS”), Tay Swee Eng, deputy general manager of CS Land Pte Ltd (“CS Land”) and Diana Lim, who was the head of finance at CSIS.  The team continued to manage the majority of the Group’s major assets much of which was substantial property such as No. 23 Wall Street, New York and various others in different parts of Asia including the Mainland, Singapore, Hong Kong and Indonesia.

10.  It is not necessary to go into detail about the events that led up to the breakdown in the relationship between the parties. The most important events alleged by Sonangol are as follows.

(1) In April 2014 Sam Pa was placed on the US’s sanction list for his activities in Zimbabwe.  As I have mentioned he was detained in the Mainland in October 2015.  Ms Lo has been out of contact since June 2017.

(2) On 4 May 2017 Ms Fung appointed herself a director of two Group companies: Virtual Aims Ltd (“Virtual Aims”) and Deptford Global Ltd (“Deptford”).  However, the necessary directors or shareholders’ resolutions had not been passed.

(3) On 24 July 2017 Ms Fung and Harry Fung appointed themselves as directors of another Group company: Sky Accord Ltd (“Sky Accord”).  As with Virtual Aims and Deptford, the appointments were unlawful as the necessary directors or shareholders’ resolutions had not been passed.  Following these appointments Ms Fung took various other steps to take control of other Group companies, all of which relied on the unlawful and ineffective changes to the boards of Virtual Aims, Deptford and Sky Accord.  Ms Fung then took steps to remove Lawrence Lam, a central member of the Singapore Management Team, as a director of a number of Group companies.  Ms Fung and Harry Fung caused the appointment of Diana Lim as corporate representative of Deptford and then Ms Lim purported to pass a resolution of Deptford removing Ms Lo and Kwan Man Fai (“Mr Kwan”) as directors of its subsidiary Newtech Holdings Ltd. (“Newtech”).

(4) These changes gave Ms Fung control of the Group.

(5) The changes were made in clear contravention of the constitutions of the various companies and are void and of no legal effect.

(6) Ms Fung has not even been able to produce resolutions to support the changes other than in the case of LL International Holdings and the resolutions to remove Ms Lo and Mr Kwan as directors of Newtech.

(7) Ms Fung has caused the termination of 11 members of the Singapore Management Team including Lawrence Lam and Philip Ye.

(8) Since May 2017 Ms Fung has restricted Sonangol’s access to information about the Group’s activities.

11.  Although the 2^nd to 6^th Respondents dispute the basis upon which Sonangol says that CSIL was formed and the asserted agreed business practices, they have not filed any evidence in response to the present application contesting Sonangol’s factual case.

12.  The 2^nd to 6^th Respondents contest the application on the grounds that:

(1) There is no serious issue to be tried; and

(2) As the Petitioner seeks a buy-out order it is unnecessary and inappropriate to make an order which alters the current balance of power and control in the Group.

Relevant Principles – interlocutory injunctions

13.  The principles by reference to which the court determines applications for interim injunctions are well known and uncontroversial.  It is convenient to quote Ms Chan’s summary of them.

“22. The principles are well known to this Court:[2]

22.1 First, there must be a serious question to be tried. This is not a high threshold. All that has to be shown are prospects of success which, in substance and reality, exist.

22.2 Second, the Court will consider the adequacy of damages, i.e. whether if the plaintiff succeeds at trial, he/she would be adequately compensated by damages for any loss caused by the refusal to grant an interlocutory injunction.

22.3 Third, where there is doubt as to the adequacy of the respective remedies in damages, the question of balance of convenience arises.

22.4 Where a mandatory injunction is sought, the application is usually required to show a ‘strong prima facie case’, though there is no need to show that the case is so strong as to entitle the applicant to obtain summary judgment. However, this is not an inflexible rule: the ultimate question remains what is the course to adopt that involves the least injustice.

22.5 Where other factors appear to be evenly balanced, it is a counsel of prudence to take such measures as are calculated to preserve the status quo. The ‘status quo’ is the state of affairs before the most significant recent change.[3]”

No serious issue to be tried

14.  The 2^nd to 6^th Respondents argue that there is no issue to be tried.

15.  Mr Joffe’s argument (adopted by Mr Ho on behalf of the 2^nd Respondent) can be summarised as follows.  There are two grounds on which unfairly prejudicial conduct may be constituted in the context of section 724 of the Companies Ordinance, Cap 622.  The first is where there has been a breach of the terms on which it has been agreed the affairs of a company should be conducted, such as a breach of the articles or a shareholders’ agreement.  Secondly, where equitable considerations arising at the time of the commencement of the relationship, or subsequently, make it unfair for those conducting the affairs of a company to rely on their strict legal rights: using the rules in a manner which equity regards as contrary to good faith[4].

16.  The type of circumstances in which equitable considerations can arise are explained by Lord Wilberforce in his well-known judgment in Ebrahimi v Westbourne Galleries Ltd[5] in which he identifies as a central component “an association formed or continued on the basis of personal relationship, involving mutual confidence–this element will often be found where a pre-existing partnership has been converted into a limited company”.  In my view necessarily it cannot be sufficient to demonstrate that the shareholders who come together to form a company trusted one another: it would be rare for a company to be formed if they did not.  Something more will almost always be necessary before the second basis can be established.

17.  As Mr Joffe points out CSIL was formed, so Sonangol alleges, between Angola’s state owned national oil company (Sonangol) and  New Bright; a company formed by Mainland entrepreneurs.  I agree with Mr Joffe that in these circumstances there is no justification for imposing on the way in which a shareholder exercises his legal rights equitable principles that in some relevant way limit or curtail them.  However, that is not how I understand Sonangol puts its case.

18.  In [41] of the Petition Sonongol asserts, and I quote:

“41. At the inception of CSIL, it was the mutual understanding and legitimate expectation of New Bright (represented by Sam Pa and Ms Lo) and Sonongol EP, and accepted by both of them, that the affairs of the CSIL Group should be managed on the following fundamental bases and that neither shareholder could depart from or change such bases without the other’s consent (collectively, ‘Fundamental Bases of Cooperation’):

41.1 The shareholders would be entitled to participate in the management of the CSIL Group in that:

(a) The directorship in CSIL would correspond to the shareholding of the shareholders such that New Bright (holding 70%) would be entitled to appoint 2 directors and Sonangol EP (holding 30%) would be entitled to appoint one director.

(b) Each shareholder would be entitled to appoint its representative to be a director of any companies with the CSIL Group and an authorised signatory of any of the bank accounts held by these companies.

(c) Each shareholder would be obliged to take all necessary steps so as to effect the above appointments.

41.2 Each shareholder would use and leverage its experience, resources and connections in managing and expanding the businesses and investments of the CSIL Group. For this purpose, New Bright would be represented by Sam Pa and Ms Lo, and Sonongol EP would be represented by its incumbent chairman or CEO.

41.3 Sonangol EP would be in charge of the management of the crude oil related businesses in Angola, while New Bright would be in charge of the management of the non-crude oil related businesses outside of Angola.

41.4 The shareholders and directors would consult with each other in respect of all major matters including all financial matters concerning CSIL and the CSIL Group, and no shareholder or director shall commit CSIL or the CSIL Group to any new business or investments or dispose of any business or investments without the other’s consent.

41.5 All major decisions concerning the affairs of the CSIL Group including any change in the Singapore Management Team and the appointment of Nominee Directors and Nominee Signatories (as defined in §43 below), could only be made upon consultation with all shareholders and with their consent.

41.6 Given the considerable value and the complexity of the non-crude oil related businesses, save for the Excepted Investments, their day-to-day affairs would be overseen and managed by a team of professional managers independent of the shareholders, i.e. the Singapore Management Team.

41.7 To achieve a check and balance, and to protect the Major Assets and the funds deposited in the Major Bank Accounts for the benefit of all CSIL’s shareholders, the Singapore Management Team would act as Nominee Directors in respect of almost all subsidiaries holding Major Assets and as Nominee Signatories (as defined in §43 below) in respect of all Major Bank Accounts.

41.8 The shareholders would be kept fully informed of the business and affairs of the CSIL Group. For this purpose, each shareholder was obliged to keep the other shareholder informed of all its dealings in relation to the CSIL Group’s affairs and provide all information and documents as may be requested by the other from time to time.”

19.  Mr Joffe submits in my view correctly, that this is not a pleading of a shareholders agreement.  There are no facts and matters pleaded that allow the reader to determine how it is alleged that either a “mutual understanding” or a “legitimate expectation” arose and the implication of the language, which has presumably been carefully chosen, is that whatever discussions took place prior to the incorporation of CSIL fall short of an agreement.  The term “legitimate expectation” is not a term of art in company law and practice and to the extent that it is intended in some way to import public law notions of legitimate expectation into the regulation of the parties’ rights and duties it is wholly misconceived.

20.  Ms Chan argues that the mutual understanding is demonstrated by the evidence of Tiago Alexandre Fonseca Costa Neto contained in [46] to [50] of his 1^st affidavit.  I disagree.  Putting to one side the fact that the matters are not relied on in the Petition, the matters to which Mr Neto refers all occurred from March 2017 onwards.  How the shareholders conducted their affairs 12 years after CSIL was formed in my view cannot prove what understandings they had at the time CSIL was formed.  Something contemporary with the Company’s formation is necessary.  The other matter relied on is the evidence of Lawrence Lam.  As is the case with Mr Neto’s evidence, the matters to which Mr Lam refers occur long after the formation of CSIL (from 2015) and are not relied on in the Petition as supporting the mutual understanding or legitimate expectation.

21.  In [43] of the Petition it is asserted:

“43. In respect of the appointment of any employees as directors of subsidiaries/associates which control the Major Assets (other than the Excepted Investments) or authorised signatories of their bank accounts (collectively ‘Nominee Directors’ and ‘Nominee Signatories’ respectively), it had always been accepted by all the shareholders of CSIL that (collectively ‘Accepted Practices’):”

22.  Nowhere in [43] is it asserted that the Accepted Practices arose from an express agreement or what facts or matters are relied on as giving rise to them.  This is a manifestly inadequate way of pleading (technically the petition is not a pleading) a case.  The implication of [43] is that overtime this was the way in which the affairs of CSIL were conducted and that it would be inequitable to allow New Bright to depart from this practice.  Deciding whether or not the facts support this argument and consequently engage the 2^nd of the bases, which are capable of constituting relevant unfairly prejudicial behaviour, necessarily involves, first, pleading how it is contended the facts and matters, give rise to a practice rather than constitute a series of random events and, secondly, pleading how the facts and matters relied on engage equitable considerations.  It does not follow that because shareholders have for an extended period of time after a company’s formation conducted its affairs in a particular way, that it is inequitable for a majority shareholder to decide to change the way the relevant matters are dealt with in the future if the shareholder takes the view that changing circumstances justify so doing.  Indeed one would expect a company’s practices to change over time

23.  Paragraphs 41 and 43 are wholly inadequate if what the drafter intended was to assert that the 2^nd ground is engaged in the present case.

24.  In [67] of the Petition it is asserted that “In breach of the Fundamental Bases of Cooperation and the Accepted Practices, the affairs of the CSIL Group have been conducted in a manner unfairly prejudicial to the interests of CSIL and Sonangol EP in that …”.  There then follows particulars of unfairly prejudicial conduct.  All the matters asserted in [67] to [121] are said to be unfairly prejudicial because they breach the Fundamental Bases of Cooperation and the Accepted Practices.  For the reasons that I have explained it follows that even if the matters asserted in [67] to [121] were proven they would not entitle Sonangol to the relief under section 724 sought in [122].

25.  The Petition does not advance an alternative analysis relying on the reconstitution of the boards of some of the subsidiaries as constituting a breach of obligations owed to CSIL or to Sonangol and constituting a separate head of unfair prejudice.  It may be that it would have been possible to have pleaded such an alternative case, but as Sonangol has not it does not seem to me appropriate for the court to attempt to identify a better case capable of sustaining the Petition and the present application.

26.  I, therefore, agree with Mr Joffe that the entire premise of the Petition is flawed and that it fails to demonstrate a serious issue to be tried.  The drafting of the Petition betrays a failure to appreciate that section 724 does not give the court jurisdiction to grant relief whenever the judge feels that it would be fair, in the loose layman’s sense of the word, to do so.  As Arden LJ explains in Re Tobian Properties Ltd[6], and I quote in [52] to [54] of my decision in Re Asia Television Ltd[7] in which I address this very point, unfair prejudice must be understood in the context of company law and the courts must act on a principled basis even though the concept is to be approached flexibly.  Her Ladyship then goes onto to explain the relevant principles by reference to Lord Hoffmann’s judgment in O’Neill v Phillips supra. Despite the admonitions in these judgments drafters of petitions continue to fail to pay attention to the relevant principles when formulating their clients’ cases.  The present case is the most recent in a long and undistinguished list of examples.

Is interim relief necessary or appropriate?

27.  Mr Joffe further argues that if I accepted that a serious issue to be tried has been demonstrated there is no justification for granting the injunctions sought by Sonangol.  The relief sought in [122] at the Petition is an order that New Bright buy out Sonangol.  There is no alternative claim that either Sonangol buy out New Bright or that CSIL be wound up, and consequently there is no need for an injunction as such loss as may have been caused by the matters complained of can be adequately dealt with in the valuation of the shares, assuming that they have an adverse effect on the value of CSIL, which is not expressly asserted in the Petition, although there are some relatively minor claims that loss has been caused by some of the matters complained of: see, for example, [94].

28.  The relevant principles are well settled.  If what is sought is a buy-out order and the matters complained of can be taken into account in the valuation of the shares an injunction restraining the respondent from excluding the petitioner will generally not be necessary.  It will generally be appropriate to leave the prospective purchaser in control of the company.  As I explain in Wako Giken (HK) Co Ltd[8]:

“12. The petitioners seek in their petition a winding-up order or alternatively an order that the first respondent buy their shares in the Company. During the hearing, Mr Maurellet informed me that the first respondent was prepared in principle to buy out the petitioners. This was an offer, which as Mr Smith pointed out, had not previously been made. As I understand the petitioners' position, they would be content to be bought out at a fair price. They are concerned that given the claims against the first respondent in Japan and the value of the Company that the first respondent could not afford to buy their shares. Their position is accordingly that the Court should proceed on the basis that there is a real possibility that if they are successful at trial, the Company will be wound up. This is relevant to the present application in this way. If the petitioners have made out an arguable case, as it is accepted in the present case they have, the next question to be addressed is whether it is just and convenient to grant an injunction. The Court asks, by analogy with the test in American Cyanamid Co v Ethicon Ltd [1975] AC 396, whether a petitioner can be adequately compensated for the matters of which he complains by an order that the Court can make under s.168A of the Companies Ordinance (Cap.32) and which a petitioner seeks, or might reasonably be expected to seek. If what is sought is a buy-out and the matters complained of can be taken into account in the valuation of shares, an injunction will prima facie not be necessary. Similarly, it will normally be difficult to justify an interim order that keeps a petitioner rather than a respondent in control until judgment of the affairs of a company of which a petitioner argues a respondent should be required to become the owner. In such circumstances, it will generally be appropriate to allow a prospective purchaser to manage the affairs of a company as to the extent that leaving the management of a company's affairs in his control results in some loss either it will make no difference to the petitioner at all as it postdates the date of valuation of the shares (which is normally the date of issue of a petition) or it can be taken into account in the share valuation if it is necessary: see the discussion in Pringle v Callard [2008] 2 BCLC 505, Arden LJ at paras.23-27.”

29.  Ms Chan argues that seeking injunctive relief is not inconsistent with a buy-out order.  New Bright has not indicated a willingness to buy out Sonangol’s shares and given the uncertainty over the status of the beneficial owner of New Bright it is unclear whether and how any such order would operate.  Ms Chan argues that it is also highly doubtful that either CSIL or the Company could finance the acquisition of Sonangol’s shares: CSIL’s audited financial statement for the year ending 31 December 2015 shows it owing HK$969ml to Sonangol.

30.  I find this a puzzling argument.  The only relief sought is a buy-out.  No alternative is claimed.  Paragraph 124 seeks an injunction  “to protect and safeguard its interest in the CSIL group…”, but this seems to have been included with a view to interlocutory relief being sought, as has been the case, as it makes no sense if a buy-out order is made.  It seems to me that given the relief that is sought it is difficult to justify taking a different approach to the conventional one described in Wako Giken ibid.

31.  I also disagree with Ms Chan that without the orders sought it is extremely difficult to quantify the loss caused by the 2^nd to 6^th Respondents to the value of the Group.  This seems to me to be in practice irrelevant.  I can see no reason why, and none has been suggested, that it would not be appropriate to order a valuation at the date of presentation of the petition, or before if Sonangol could justify an earlier date.  I do not see how years later (the complaints dating back to events in 2017) reconstituting boards and management would make it any easier to quantify the impact on the value of the Group of the matters of which Sonangol complains.

Conclusion

32.  I will, therefore, dismiss the application and make a costs order nisi that Sonangol pay the costs of the 2^nd to 6^th Respondents forthwith, such costs to be taxed if not agreed, with a certificate for two counsel in the case of the 3^rd to 6^th Respondents.